The Real Value of Customers on the Internet

The Internet business is booming. The mania of initial public offerings is rolling on; stock prices were sky-high until recently, and dot-com ads are everywhere you look. What drives the value of these Internet companies?

It used to be that bricks-and-mortar companies were valued solely on profits; however, today, the value of Internet companies is driven by expectations of warp-speed growth rates -- the kind that can lead to a wildly profitable company.

But if these growth rates aren't measured by the almighty dollar, then what actually constitutes rapid growth and the potential of an Internet mega-business? The answer is customers.

Despite everything that has changed because of the Internet, the fundamental building block of every company's value is still its customers.

All revenues and costs can be mapped back to the customer: what they paid for a product, what it cost to produce/deliver the product or service and what it cost to acquire that customer.

So here is the question for anyone observing the Internet and stock market frenzy: Is the value of Internet company customers any different from the value of customers of bricks-and-mortar companies?

The answer is yes. The stock market calculates my value as a customer, to a business such as Amazon.com or America Online, as their market capitalization divided by their total number of customers.

In today's market, the result of this formula is bigger than one might expect, and at first glance, it seems incorrect. I spend a relatively small amount of money with each company in comparison to how much dollar value they place on my business. Why am I worth so much to these companies when I spend only a couple hundred dollars a year with them? My relationship to them as a customer has a hidden value. The Internet has given my patronage more weight.

For the record, I do believe the Internet does change everything, including how to value customers. Smart businesses today have recognized that customers are worth far more than just the sum of their purchases. They are worth other customers.

Internet business strategists are catching on to this "customers equal customers" equation. Venture capitalists and the public markets have thrown a lot of money at companies so they can acquire these valuable customers quickly. Is it worth it? Yes, if customers beget more customers -- and more customers beget more investors, then customers and the rate at which they can be signed up can determine a company's worth.

Luckily for all businesses, it is a "virtual" land grab right now in respect to obtaining customers on the Internet. See a customer; grab them. Grab more than all the other guys. Hoard. And this is essentially what businesses need to do today because, relative to the new value customers provide, it will likely never be this inexpensive to acquire customers.

In 2000, the compounded value of customers on the Internet is the ability to attract other customers and thus snowball a business' success in the early stages of Internet market growth. I think we are in only the second or third inning of the evolution of the Internet market, so businesses need to move quickly to lock up customer relationships.

From there, the future value of customers is all about making them profitable by retaining customers and keeping them happy. It costs six to 10 times more to acquire a new customer than to retain an existing one. Think how cost-effective it would be to obtain those customers now.

Additionally, the relatively new phenomenon of being able to create value from customers in multiple ways also compounds their worth.

For example, my value to a company like AOL is a combination of what I pay them in monthly subscription fees, what they can make in advertising from selling access to my eyeballs, what they can make by selling my information to direct marketers if they choose and my ability to bring them other customers.

This multiple-value phenomenon will increase as technology progresses.

Therefore, my advice is to run like mad acquiring customers today and invest like mad in keeping them happy so they stay with your business and attract other customers by word-of-mouth, referrals, scale and the credibility of your business.

The Internet world thrives on viral marketing. Viral marketing, in its purest form, is simple word-of-mouth communication. The more mouths you have speaking about you, the better off you are -- if they are speaking positively about your products and services.

Here's where your company's prudence comes into the equation: On the Internet, how you treat your customers directly affects your bottom line. Be good to your customers -- not only will they repeat buy, but they will also tell their friends and neighbors about you. They have the power to persuade or dissuade other potential customers. Recognize their power and put your energy into first obtaining and then maintaining their repeat business.

Dot-coms may come and go, but customers are here to stay. What's the right amount to pay for a customer? There is no correct answer. But you have the power to create more value from your customers than you might think, and the time to acquire them and invest in great customer relationship management systems is now. So bring them in, nurture their patronage, and you'll watch your customer base grow.

Customers do indeed equal other customers. That is the real value of customers in the Internet-driven economy.

EXTENDED DEADLINE

You have until Wednesday, December 7 to get your entries in. Learn more here.